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Promise and Betrayal: Can We Really Expect the Olympics to Stimulate Local Economies?

Soon after the first starting pistol was fired, and this year’s
London Olympics were underway, a curious observation crossed the
Atlantic: the city was unusually quiet. Following months of warnings
from local authorities of imminent disruptions resulting from a surge of
visitors, The Telegraph, on the eighth day of the Games,
reported a 17 percent decline in traffic, 10 percent decline in local
shop patronage, and a 30 percent drop in visits to major tourist
destinations. In other words, this world class event had the exact
opposite effect of what most would expect. Quickly recognizing the
overestimation of expected benefits to London’s economy, business groups
began blaming authorities for the lull, believing their warnings to
have had a perverse effect on economic activity by persuading many
people to avoid the capital all together.

This explanation
seems plausible, and finds some support in a recent example from the
U.S., when public service announcements issued by Los Angeles officials
meant to divert drivers from the storied Interstate 495 for construction
worked flawlessly. But can an effective campaign fully explain the
Olympics’ lackluster performance in the sport of generating local
economic activity, or were the estimates overstated to begin with? The
latter is not a new question, and it is one that evokes a past article
on this very website. But it is a question worth revisiting as Rio de
Janeiro—the second largest city in an emerging but still impoverished
Brazil—prepares to host the 2014 World Cup and 2016 Olympic Games. After
all, it is much more difficult know whether or not the massive public
investment needed by Brazilians—currently estimated at $33 billion for
both events—is worth it if the extent to which major sporting events
benefit a regional economy is unknown.

Economists who have
researched large events in the past seem to agree that impact figures
are often overstated. This should be of little surprise, however, as
such analyses are often commissioned before an event in order
to increase public support for the investments needed. In a 2008 article
on the economic impact of past Olympics, the economists Philip Porter
and Deborah Fletcher cite a history of inflated estimations associated
with the Games. These ex ante predictions, they write, “are
used as justification for public subsidies and to help convince voters
that it is good business to use scarce tax revenues to secure and
promote the Games.” They found that what results, however, is
“substantial debt” and “little or no noticeable benefits.”

For
these reasons, the authors caution against using input-output models to
make predictions, advocating for estimations based on past results
instead. Sparing the economic jargon, their reasoning rests largely on
the fact that impact modeling drastically overstates expected economic
benefits by translating the short-term, immediate stimulus from the
Olympics into long-term, structural changes in a regional economy. To
illustrate this point, imagine the World Cup is expected to increase the
demand for hotel rooms in downtown Rio by 20,000 for the length of the
tournament. In a modeled environment, hotels would respond to this
demand by building enough rooms to accommodate every additional visitor.
What we know from reality, and some economic theory, however, is that
while some new rooms will certainly be built, much of the short-term
demand will translate instead into higher prices.

As long
as major events like the Olympics maintain their allure as world-class
feats that prove a nation’s affluence and success, the fierce
competition to act as host—and the impact studies meant to fuel that
race—will continue. What we can hope for, then, is that the taxpayers
supporting these massive investments push for unbiased and accurate
analyses that expose the true costs and benefits. Winning gold when it
comes to economic development, after all, requires knowing what the
medal is actually worth.